Misleading fiscal deficit

Topics fiscal deficit

Questions about the Union government’s borrowing have been increasingly heard over the past few years, and are now reaching a crescendo. As this newspaper has reported, the Comptroller and Auditor General (CAG) has told both Parliament and the Fifteenth Finance Commission that the numbers in the Union Budget fail to include the growing off-Budget liabilities of the Union government. The CAG would like these numbers to be included in the Budget estimates. However, the government contends that it has already gone further than required in the 2019-20 Union Budget to account for these borrowings because “both the provisioning of repayment of principal and of interest of off-Budget borrowings is being made through the Budget”. 

The government also points out that there is no formal requirement to include off-Budget borrowing in the estimate of the fiscal deficit. On this matter the government is quite correct — but on the other hand, appealing to formal requirements is a weak argument in this context. After all, the Finance Comm­ission has the powers to alter formal definitions used by the government. While the government might well have procedural correctness on its side, the CAG al­so has good reasons to complain that the fiscal deficit number is not an accurate reflection of the government’s spending and borrowing behaviour over the financi­al year. It pegs the actual fiscal deficit at close to 6 per cent, as distinct fr­om the 3.3 per cent claimed by the government in the Budget numbers for 2019-20. The government can complain correctly that the statement of the fiscal de­fi­cit is in line with the currently accepted definition. But then there can be no credible cla­im that the fiscal deficit is the right number to look at to judge fiscal prudence.

The correct way of resolving this difficulty would be to examine, instead of the fiscal deficit, a public-sector borrowing requirement measure, and a flow variable for the public debt that takes into account not just budgetary spending and off-budget liabilities but all contingent liabilities of the government. This would provide a clear and transparent accounting of the degree to which the choices of the Union government are adding to the debt burden of future generations, as well as how much private investment is being crowded out by public borrowing. After all, it is these latter two that matter from the point of view of sustainability analysis of Indian public finance. This number would undoubtedly be undesirably large at the moment. The government has taken to using public undertakings such as Food Corporation of India in a manner not previously envisaged. Their implicit sovereign guarantee means they can borrow from the markets and help finance the government’s spending priorities like food subsidy. In this manner, the fiscal deficit conceals the government’s real fiscal imprudence. The Finance Commission will hopefully take this behaviour on board and reconsider how government spending and borrowing statistics are presented. Such a revaluation would aid both the government in planning public investment and savings as well as the broader investment community, which seeks a clearer understanding of state choices and the future condition of the public debt market.

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